The concept of economic growth relates to the expansion of an economy, which could either be positive, zero or negative. This research set out to understand two aspects of trade in services in ASEAN and SADC between 2000 and 2018. First, the determinants of imports and exports of services and second, the contribution of the services sector to the regions’ economic growth. To ascertain the determinants of trade in services, two distinct log-linear models were created using the existing literature and regressed using the OLS and FE estimation methods.
In the second part, a log-linear economic growth model was created using the neo-classical Swan-Solow model (1956) as its theoretical underpinning and regressed using the OLS, FE and 2SLS (fixed effect) regression methods.
The FE results (for import and export models) for ASEAN and SADC in the first part are preferred under the Hausman test. For ASEAN, the FE results (in Table 3.3) indicate that service imports are significant and positively correlated with goods imports and exports and
111 regulatory quality. They indicate that a 1 per cent increase in goods imports would likely increase service imports by up to 0.48 per cent and service imports may also increase by up to 0.6 per cent following a 1 per cent increase in goods exports. They also point to a possible increase of service imports in ASEAN by up to 0.13 per cent following a 1 per cent increase in the level of regulatory quality. Whilst a decline in human capital will likely reduce service imports by 2.08 per cent.
The FE results for SADC suggest that a significant and positive correlation between service imports and FDI, goods imports and exports and regulatory quality. They also point to a significant and negative correlation between service imports and ODA. There is a suggestion that a 1 per cent increase in goods imports may increase service imports by up to 0.65 per cent and the same percentage increase in goods exports is expected to increase service imports by up to 0.18 per cent. A 1 per cent improvement in regulatory quality is expected to increase service imports by up to 0.33 per cent. A 1 per cent decline in ODA may decrease service imports by up to 0.09 per cent.
The FE results for services exports (Table 3.3) in ASEAN suggests a significant and positive correlation between service exports and human capital, population size, ODA, goods imports and regulatory quality. They also indicate a significant and negative correlation between service exports and goods exports. The results suggest that a 1 per cent increase in human capital is likely to increase service exports by up to 0.96 per cent. A 1 per cent increase in population size is expected to increase service exports by up to 4.5 per cent. This emphasizes that larger economies in ASEAN tend to export more. Whereas, for SADC, size is not a determining factor that is linked to its exports.
The results also highlight the importance of regulatory quality. A 1 per cent improvement in regulatory quality could possibly increase service exports in ASEAN by up to 0.52 per cent. They also point to a likelihood of services exports declining by up to 0.83 per cent following a decline in goods exports by 1 per cent.
The FE results for SADC suggest that a 1 per cent increase goods imports is likely to increase service exports by up to 0.68 per cent. They also indicate that a 1 per cent decline in the level of infrastructure would lead to a decrease in service exports by up to 0.19 per cent.
The significant and negative correlation between infrastructure and services exports for SADC suggests that there is a need to increase investments infrastructure. Given that the bulk of service exports were through Modes 1 and 2 in 2017, the investments should be directed towards creating reliable digital networks and building sufficient human capacity to maintain
112 them, at the same time, directing resources towards hard infrastructure such as roads and airports to support the tourism and travel sectors which are mostly associated with Mode 2.
Overall, the STRI scores reveal that the SADC region maintained a more liberal services regulatory regime than ASEAN as at the end of December 2018. Mauritius, Singapore and Zambia, were found to have the most liberal regulatory regime for the six service sectors chosen for this study. Whilst Indonesia and Zimbabwe have the most stringent services regulatory regime with respect to foreign investment in the six sectors amongst the ASEAN and SADC members.
In the second part, in addition to the OLS and FE estimation methods used, the 2SLS estimation technique is also employed, whereby FDI is instrumented to mitigate against endogeneity. The FE model is preferred over the OLS under the Hausman Test for the import and export models. The Hausman Test also prefers the 2SLS model over the FE model.
The three estimation results for the import model for ASEAN indicate that a 1 per cent increase in services imports could likely contribute up to 0.27 per cent to ASEAN’s GDP per capita. Whereas the three estimation results for the import model for SADC points to a likely increase to the region’s GDP per capita by up to 0.33 per cent. Whereas the three estimation results for the export model for SADC export model points suggests that a 1 per cent increase in services exports is expected to raise its GDP per capita by up to 0.11 per cent. The three estimation results for the export model for ASEAN suggests that the same level of increase in service exports is associated with a likely to increase the region’s GDP per capita by up to 0.19 per cent. These findings are in line with findings made by Francois (1990a), Levine (1997), Hoekmann and Mattoo (2008), Alege and Ogundipe (2015). In addition, they also align with the findings of studies that employ a 2SLS estimation technique to evaluate the effects of trade in services on economic growth; undertaken by Frankel and Romer (1999), Caner and Hansen (2004), Kim (2011), Charif, Hassanov and Wang (2018) and Nordas (2019).
The import results are counterintuitive in the sense that imports tend to be viewed negatively largely because of the formula used to calculate GDP. As we have seen from the literature review in Chapter 2 (Section 2.3), imports related to capital goods and technology tend to improve an economy’s productivity. In the literature review on services in this chapter (Section 3.2), we can appreciate that services acts inputs to the productive sector as well as in the production and supply of other services. Based on the results we can also observe that services imports have a greater impact on economic growth in SADC than services exports.
Therefore, this positive outcome suggests that it would be in the interest of these two regions to create a conducive environment to facilitate both import and export of trade in services.
113 The import and export results also point to a positive relationship between gross fixed capital formation, this is in line with the prevailing literature (see discussion in the literature review in Chapter 2 and discussion of the results). The estimation results for both models also point to the beneficial impact of infrastructure quality in ASEAN. Given, its importance the region should prioritise projects that would enhance trade to enable it to achieve higher economic growth rates. All three estimation results for both models for both regions suggest a negative relationship between control of corruption and economic growth, therefore it is essential that both regions strive to mitigate against corrupt practices and increase transparency and good governance.
In addition, all three estimation results for the import and export models for SADC show that there is a negative association between FDI and economic growth. Such a finding corroborates with the conclusion reached by Brecher and Diaz-Alejandro (1977); Germidis (1977); Mansfield and Romeo (1980); Brecher, (1983); Haddad and Harrison (1993); Boyd and Smith (1993); Aitken and Harrison (1999) and Carkovic and Levine (2002). Their findings suggest that FDI inflows tend to favour host economies with less excessive regulatory environment and more sound institutional settings, in addition, they tend to crowd out domestic investment, particularly in developing economies. As pointed out by the WGI data (Figure 2.8), majority of the SADC economies have poor regulatory and institutional frameworks.
Based on the results obtained from this research, it is in the best economic interest of these 26 economies to develop frameworks that will allow services to grow in general, given that the results indicate that both imports and exports of services have a beneficial impact on economic growth. The results indicate that it is also worth evaluating the impact of the regulatory barriers, given the magnitude of the impact of services imports on the economic growth of these 26 economies.
114
Chapter 4
Concluding Remarks
In this dissertation, I investigate the effects of trade and trade in services on economic growth in ASEAN and SADC between 2000 and 2018. Trade theory implies that its benefits are accrued through comparative advantage. Literature in the 1970s and 1980s considered exports as the likelier engine of economic growth based on the impressive economic growth amongst the East Asian economies during that time. However, several studies suggest that imports equally contribute to economic growth because they facilitate the accumulation of capital goods and infrastructure development. In addition, the role of services in the manufacturing and in the production of other services has been documented and tend to show their positive effects on economic growth.
Chapter 2 is divided into two parts. In the first section, I created three models (trade, import and export) based on the neo-classical Swan-Solow (1956) growth model to investigate the relationship between trade and economic growth amongst the 26 economies of ASEAN and SADC. The trade model is used for benchmarking purposes. The modelling results indicate that a 1 per cent increase in imports would likely increase the combined economic growth of between 0.38 and 0.24 per cent and a 1 per cent increase in exports are expected to contribute between 0.44 and 0.32 per cent increase in the regions’ economic growth.
In the second part of the study, I used the quantile regression method which was pioneered by Koenker and Basset’s (1978), to understand the effects of the chosen variables on economic growth amongst these 26 high and low growth economies. . The results suggest that the relationship between imports and exports and economic growth is significant and positive amongst the low and high growth economies, but their importance tends to wane as the economies expand. The prevailing literature and research suggest that low growth economies tend to be more reliant on international trade because their export concentration ratios are skewed towards a limited number of primary products. They also rely heavily on the imports of goods because they are lacking a mature manufacturing sector, its development is being constrained by the limited availability of viable infrastructure and supply-side constraints.
Chapter 3 is also divided into two parts; it first attempts to identify the determinants of imports and exports of services in ASEAN and SADC. The results point to a significant and positive correlation between ASEAN’s services imports and trade in goods and regulatory quality. Whereas for SADC, services imports are significant and positively correlated with FDI,
115 trade in goods and regulatory quality. There is also a significant and negative correlation between services imports and ODA. As for services exports, there is a significant and positive relationship between ASEAN’s services exports and human capital, population size, ODA, goods imports and regulatory quality. They also indicate a significant and negative relationship between services exports and goods exports. The results for SADC, point to a significant and positive relationship between services exports and goods imports and suggest a significant and negative correlation with infrastructure quality.
In terms of policy implications, the 26 economies need to lower and maintain low barriers to ensure that they do not impede trade. Whilst exports play a significant role in driving economic growth, imports are equally important in driving up economic growth. It is worth noting that the results indicate that service imports have a greater impact on the regions’
economic growth. The STRI assessment of these economies, suggest that the ASEAN region maintains elevated levels of services trade restrictions in comparison to the SADC region.
Services such as communication transportation and retail sectors serve an important function in the production and consumption of goods and elevated levels of restrictions tend to negatively impact its bilateral goods trade.
The results also indicate that SADC needs to prioritise infrastructure funding to improve its services exports and its overall economic growth. The latest data indicates that 52 per cent of the SADC’s services are exported through Mode 1, which suggests prioritising investments in digital infrastructure. In addition, SADC economies should be constantly reviewing existing frameworks with a view to facilitating FDI given that the bulk of their services imports are traded through Mode 3 (47 per cent).
The second part of this chapter assesses the effects of trade in services on economic growth in the 26 economies. The modelling results indicate that a 1 per cent increase in services imports is expected to raise ASEAN’s GDP per capita by up to 0.27 per cent and a 1 per cent increase in service exports linked to rise in the region’s GDP per capita by up to 0.19 per cent.
For SADC, the modelling results suggest that a 1 per cent increase in service exports is expected to raise its GDP per capita by up to 0.33 per cent and the same percentage increase in services exports is likely to boost its GDP per capita by up to 0.11 per cent. . The 2SLS results for the services imports and exports had a greater magnitude than the OLS and FE results for the SADC region. In addition, all three estimation results for the import and export models for both regions point to a significant and positive association between the regions’ GDP per capita and accumulation of capital goods (GCFC), in line with the prevailing literature.
116 Importantly, it answers the four main questions set out in the Section 1.35 - Dissertation Objective. In a nutshell; (1) Trade (import and export) has a statistically significant and positive effect on the 26 economies of ASEAN and SADC; (2) Whilst all the economies are positively impacted by trade, the quantile regression results indicate that as the 26 economies become wealthier their growth becomes less dependent on trade; (3) the modelling results suggest that trade in goods, ODA, regulatory quality, infrastructure quality, human capital and population size have varying impacts on the imports and exports of services in ASEAN and SADC; and;
(4) This research suggests that there is a significant and positive relationship between the imports and exports of services on the economic growth of ASEAN and SADC.
The methodologies employed in this research can serve as a useful tool for policy makers because it can be replicated in any region or economy to enable them to perform strategic interventions to improve economic growth.
117 Annex I: Service Trade Restriction Index
1. Air Transport
Category Code Libelle Weight
TRair.1 Foreign equity restrictions: maximum foreign equity share allowed (%) (domestic traffic - cargo) 0.1 TRair.1 Foreign equity restrictions: maximum foreign equity share allowed (%) (domestic traffic - passenger) 0.1 TRair.1 Foreign equity restrictions: maximum foreign equity share allowed (%) (international traffic - cargo) 0.1 TRair.1 Foreign equity restrictions: maximum foreign equity share allowed (%) (international traffic - passenger) 0.1 TRair.1 There are limits to the proportion of shares that can be acquired by foreign investors in publicly-controlled firms (cargo) 0.05 TRair.1 There are limits to the proportion of shares that can be acquired by foreign investors in publicly-controlled firms (passenger) 0.05 TRair.1 Licensing/permits are subject to quotas or economic needs tests (domestic traffic - cargo) 0.025 TRair.1 Licensing/permits are subject to quotas or economic needs tests (international traffic - cargo) 0.025 TRair.1 Licensing/permits are subject to quotas or economic needs tests (domestic traffic - passenger) 0.025 TRair.1 Licensing/permits are subject to quotas or economic needs tests (international traffic - passenger) 0.025
TRair.1 Lease of foreign aircrafts without crew (dry lease) is prohibited (cargo) 0.0125
TRair.1 Lease of foreign aircrafts without crew (dry lease) is prohibited (passenger) 0.0125
TRair.1 Lease of foreign aircrafts without crew (dry lease) is permitted subject to prior authorization (cargo) 0.0125 TRair.1 Lease of foreign aircrafts without crew (dry lease) is permitted subject to prior authorization (passenger) 0.0125
TRair.1 Lease of foreign aircrafts with crew (wet lease) is prohibited (cargo) 0.0125
TRair.1 Lease of foreign aircrafts with crew (wet lease) is prohibited (passenger) 0.0125
TRair.1 Lease of foreign aircrafts with crew (wet lease) is permitted subject to prior authorization (cargo) 0.0125 TRair.1 Lease of foreign aircrafts with crew (wet lease) is permitted subject to prior authorization (passenger) 0.0125
TRair.2 Limitation on duration of stay for intra-corporate transferees (months) 0.033
TRair.2 Limitation on duration of stay for contractual services suppliers (months) 0.033
TRair.2 Limitation on duration of stay for independent services suppliers (months) 0.033
TRair.3 Foreign suppliers are treated less favourably regarding taxes and eligibility to subsidies (domestic traffic) 0.025 TRair.3 Foreign suppliers are treated less favourably regarding taxes and eligibility to subsidies (international traffic) 0.025 TRair.4 National, state or provincial government control at least one major firm in the sector (cargo) 0.025 TRair.4 National, state or provincial government control at least one major firm in the sector (passenger) 0.025
TRair.5 Range of visa processing time (days) 0.0125
TRair.5 Multiple entry visa for business visitors 0.0125
TRair.5 Cost to obtain a business visa (USD) 0.0125
TRair.5 Number of documents needed to obtain a business visa 0.0125
TRair.5 Number of working days to complete all mandatory procedures to register a company 0.0125
TRair.5 Total cost to complete all official procedures required to register a company (in % of income per capita) 0.0125
TRair.5 Number of mandatory procedures to register a company 0.0125
TRair.5 Time taken for customs clearance (days) 0.0125
118 2. Commercial Banking
Category Code Libelle Weight
FSbnk.1 Foreign equity restrictions: maximum foreign equity share allowed (%) 0.15
FSbnk.1 There are limits to the proportion of shares that can be acquired by foreign investors in publicly-controlled firms 0.15
FSbnk.1 Legal form: foreign branches are prohibited 0.075
FSbnk.1 Legal form: restrictions on foreign branches 0.075
FSbnk.1 Quotas or economic needs tests are applied in the allocation of licences 0.0125
FSbnk.1 Criteria to obtain a licence are more stringent for foreign companies 0.0125
FSbnk.1 Restrictions on the branch network 0.0125
FSbnk.1 Restrictions on ATM networks 0.0125
FSbnk.1 Some financial products are reserved for statutory monopolies 0.0125
FSbnk.1 Some banking services are reserved for domestic suppliers 0.0125
FSbnk.1 Commercial presence is required: deposit-taking 0.0125
FSbnk.1 Commercial presence is required: Lending 0.0125
FSbnk.1 Commercial presence is required: Payment services 0.0125
FSbnk.1 Local presence is required for cross-border supply 0.0125
FSbnk.1 Limitations on cross-border transfers by customers 0.0125
FSbnk.1 Restrictions on internet banking 0.0125
FSbnk.2 Limitation on duration of stay for intra-corporate transferees (months) 0.033
FSbnk.2 Limitation on duration of stay for contractual services suppliers (months) 0.033
FSbnk.2 Limitation on duration of stay for independent services suppliers (months) 0.033
FSbnk.3 Restrictions on extending loans or taking deposits in foreign currency 0.025
FSbnk.3 Restrictions on lending to non-residents for domestically licensed banks 0.025
FSbnk.3 Restrictions on raising capital domestically for foreign banks 0.025
FSbnk.3 Discrimination in the access of foreign-owned banks to the central bank discount window 0.025 FSbnk.4 National, state or provincial government control at least one major firm in the sector 0.05 FSbnk.4 The supervisor has full authority over licensing and the enforcement of prudential measures 0.05 FSbnk.5 Number of working days to complete all mandatory procedures to register a company 0.02
FSbnk.5 Number of mandatory procedures to register a company 0.02
FSbnk.5 Licences are allocated according to publicly available criteria 0.02
FSbnk.5 Time of resolving insolvency (in years) 0.02
FSbnk.5 Cost of resolving insolvency (in % of the estate’s value) 0.02